Source: Gilead Sciences
Thanks to launching the billion dollar blockbuster hepatitis C drugs Sovaldi and Harvoni, Gilead Sciences (GILD 2.18%) posted some pretty eye-popping numbers in 2014. In fact, these numbers are so impressive that I'm going to reel off a few them:
- Sales soared by 122% to $24.9 billion,
- Cash on the books tripled to $11.7 billion.
- Margins expanded by more than 20%.
- A near tripling of the company's earnings!
Dominating indications
Before I dig a bit deeper into how Gilead Sciences racked up this jaw-dropping earnings growth, let's begin with a quick refresher on the company.
Gilead Sciences' success is rooted in the company's market share-leading HIV drugs. The company markets five separate HIV therapies that are each on track to deliver over $1 billion in sales this year. These drugs include Atripla, Truvada, Stribild, Complera, and Viread. Across these market-dominating HIV treatments, the company is generating sales of more than $10 billion a year.
The company's success in HIV would already justify top-shelf status for Gilead Sciences, but its position as a tier-one biotechnology stock has been solidified by Gilead Sciences' emergence as a dominant player in hepatitis C.
In 2012, Gilead Sciences spent more than $11 billion to acquire Pharmasset to get its hands on Pharmasset's promising hepatitis C drug sofosbuvir. Then it spent countless additional dollars ushering sofosbuvir, later named Sovaldi, through late stage clinical trials in which Sovaldi notched hepatitis C cure rates eclipsing 90%.
After those results led to an FDA approval in December 2013, Sovaldi went on to rack up over $10 billion in sales during its first full year on the market. That success has been a major victory for Gilead Sciences, but the company didn't stop there. Gilead Sciences notched another important win last October when the FDA also approved its second-generation HCV drug Harvoni. Offering cure rates in the high 90% range, Harvoni has become an instant success, producing over $2 billion in sales during the fourth quarter alone.
Tripling its profit
Thanks to the ongoing success of its HIV drugs and the breathtaking climb in sales of its hepatitis C drugs, Gilead Sciences' soaring revenue is proving to be a profit bonanza for investors.
Most of the time, rising sales boost margins as fixed costs are leveraged across more total dollars. Gilead Sciences hasn't proven to be an exception. Since the company already had back-office sales, administrative support and production capacity, it didn't need to spend nearly as much to launch its hepatitis C drugs as it would have spent if these were its first products.
The benefit of leverage can most directly be seen in the company's ratio of selling, general, and administrative expenses to sales. In 2014, soaring sales resulted in the percentage of revenue spent on SG&A to drop from 13.9% to 11.1% last year. Similar success was also seen in the company's spending on R&D. Despite bumping up its spending on future potential drugs by hundreds of millions of dollars last year, the percentage of sales spent on R&D plummeted from 17.4% to 10.4%. As a result, the company's operating margin -- as I noted at the beginning of this article -- surged. That surge, combined with share buybacks, led to adjusted earnings per share of $8.09, which was a whopping 297% higher than the earnings reported in 2013!
Why it matters
According to Tufts Center for the Study of Drug Development, it costs $1.4 billion to successfully develop and commercialize a new drug. That means that biotechnology companies are always hunting for the financing to pursue potential game-changing therapies and that often those potential therapies end up being abandoned because of thin wallets. Thanks to its earnings surge, that won't be the case at Gilead Sciences.
In fact, Gilead Sciences' tripling in earnings is kicking off so much cash that in addition to financing its pipeline of future HIV and hepatitis C drugs to fend off competitors, it's also ramping its research efforts in cancer.
Last summer, Gilead Sciences launched its blood cancer drug Zydelig, and the company is conducting a slate of other cancer studies that could someday turn it a major oncology player.
The tripling in earnings has also given the company so much financial flexibility that the company recently decided to begin rewarding investors with a $0.43 quarterly dividend payment -- something that is relatively unheard of among Gilead Sciences' biotechnology peers.
Although earnings growth for Gilead Sciences is expected to be more timid this year, investors aren't likely to be too disappointed at year end. Following Gilead Sciences' fourth quarter earnings, Wall Street analysts think that Gilead Sciences EPS will climb 18.4% to $9.58 this year. That may not be as thrilling as the tripling in 2014, but it's still pretty darn good.
